Hedge fund launches rise as investor risk tolerance returns

Opalesque Industry Update: The number of new hedge fund launches increased for the fourth consecutive quarter in 1Q13, according to the latest HFR Market Microstructure Industry Report, released today by HFR, the established global leader in indexation, analysis and research for the global hedge fund industry. Hedge fund launches in 1Q13 totaled 297 funds, the third highest quarterly launch total since the beginning of 2008, narrowly trailing only 1Q12 (304) and 1Q11 (298). Hedge fund liquidations declined to 196 in 1Q13 from 211 and 238 in each of the prior two quarters, respectively.

Equity Hedge strategies led 1Q hedge fund launches with 132, as investors and fund managers were encouraged by strong gains in both U.S. and Japanese equities. Macro hedge fund launches totaled 93, while Relative Value Arbitrage RVA saw just 26 new funds launched in the period, following more than 200 such launches in calendar year 2012. Hedge fund launches in Europe exceeded those of the U.S. in 1Q13, with 180 new funds launched by European-located managers in 1Q versus nearly 100 by US-based firms.
Hedge fund performance dispersion narrowed over the prior quarter, as the HFRI Fund Weighted Composite Index gained +3.6 percent in 1Q13 and +5.3 for the trailing 12 months ending 1Q13. The top decile of HFRI constituents gained an average of +29.8 percent over this period, while the bottom decile of all funds declined by -17.3 percent, creating a top-bottom decile dispersion of +47.1 percent. For calendar year 2012, both the top and bottom deciles were
slightly higher (+32.6 and -16.0 percent, respectively) with dispersion slightly wider at +48.6
percent.

Average management and incentive fees declined for the quarter, with the average
management fee falling 1 bps to 1.55 percent, while average incentive fees declined 15 bps to
18.39 percent, their 4th consecutive quarterly decline. Average management fees for funds
launched in 1Q13 was 32 bps lower than those funds launched in 2012, while average incentive
fees for 1Q13 launches were 17.43 percent, a decline of 31 bps from 2012 launches.

“The strong trend in new launches is consistent with the trends in rising investor risk
tolerance and overall hedge fund industry capital reaching record levels,” said Kenneth J. Heinz,
President of HFR. “While total industry capital is more indicative of the trends pertaining to the
most established managers, new launches indicate strength, conviction and opportunity in small
to mid-sized funds. In contrast to 2007, when billion-dollar launches were not uncommon,
investors in 2013 prefer allocating to managers which have generated strong performance
through several market cycles, rather than committing to a large day-one investment. As investor
risk tolerance continues to improve, new fund launches will define the next generation of
performance, strategic innovation and capital expansion.”